pay gap
The US Census Bureau reports women made 82 cents per every dollar earned by men 2018.1 This represents significant progress since the 1970s, when similar figures were as low as 56 cents per dollar. But what about the remaining 18 cents? What do labor economists know about the causes of the remaining gap?

The usual caveat attached to this broad pay gap calculation is that it is “unadjusted,” or that it does not account for non-discriminatory and legitimate factors that impact compensation.  For example, there is substantial research documenting the impact of gender differences in occupations, propensity to seek part-time work, and interrupted work careers on the gender pay gap. Recent research in labor economics has focused on the impact of gender differences in preferences for flexible work schedules on the gender pay gap.

 

gender gap pay data graph


Why Do Some Occupations Pay More Equally than Others?

Labor market data shows that pharmacy is a family-friendly profession with a much smaller gender pay gap. In a comparison of full-time pharmacists, data from the Department of Labor show that women make 96.3% of what men make.2 Harvard economists Claudia Goldin and Lawrence Katz attribute this equality to major changes in the pharmaceutical industry, including 1) a shift away from privately-owned pharmacies, 2) technological advances that increased substitutability amongst pharmacists, and 3) the standardization of medications.3

Why do substitutability and standardized products translate to smaller gender gaps?  Both the training of pharmacists and the production of medications became more uniform. Your neighborhood pharmacist no longer uses mortar and pestle to measure out and supply medication, and advances in technology and record-keeping allow any pharmacist to provide personalized service. Consequently, pharmacists became interchangeable to patients – patients receive the same service, advice, and medications without relying on only one particular pharmacist or pharmacy.  These changes mean that a pharmacy needing to staff 40 hours a week can do so by employing either a full-time pharmacist or two part-time (20-hour) pharmacists without any noticeable difference in the quality of service.

This “substitutability” across pharmacists decreased the pay premiums for working full-time (instead of part-time) as exclusive full-time pharmacists were no longer necessary to retain pharmacy clients (who have varying schedules and needs). This resulted in a profession with a great deal of flexibility in its work schedule.  Indeed, Goldin and Katz found that the fraction of part-time workers among pharmacists almost doubled, with no evidence of the large full-time wage premiums that are found in other occupations with similar educational requirements (such as lawyers or financial analysts). Since women have always been more likely to seek part-time schedules, the disappearance of the wage premium for working full-time translated into a large reduction of the gender pay gap in this occupation.

Compensation and Schedule Flexibility

The unadjusted gap between the pay of male and female pharmacists, including part-time workers, is 31%. But over 82% of this gap is explained by simply accounting for hours and number of weeks typically worked. The large role hours-worked plays in this wage gap is key, and reflects the lack of a premium for working full-time instead of part-time for pharmacists.

Unlike pharmacists, many professions pay a premium for working longer and unpredictable hours, resulting in a skewed relationship between hours worked and pay (i.e., being willing to work 10% more hours translates to more than a 10% increase in compensation).  Occupations where face-to-face interaction with clients or project-specific knowledge continues to be important will exhibit large wage premiums for working full-time.  For example, it is impractical for a lawyer to be substituted in the middle of delivering closing arguments at a trial, or for a financial analyst to clock out before the closing of the markets.  The gender gap is therefore impacted by the extent to which women and men differ in their representation in occupations that pay a premium for working longer, inflexible, or unpredictable hours.

The Value of Flexibility to Employees

Employee preferences for more flexible work/schedules is quantifiable. Recent research by Alexandre Mas and Amanda Pallais estimate that workers are willing to take a position that pays 20% less in exchange for predictable work schedules, or one that pays 8% less if they are allowed to work from home.4

This research shows that flexibility in when and how much employees work matters. All else being equal, an individual willing to choose an occupation with lower pay but a more flexible schedule (part-time work) will see their earnings increase relative to other occupations as changes in the labor market reduce the wage premium for availability 24/7, 365 days a year. Now that the COVID-19 pandemic has made working from home a necessity in many occupations, a new equilibrium will emerge reflecting changes in the valuation of working from home by both employees and employers.  Similar to the pay gap, this new equilibrium will likely vary by occupation and industry.

What does this mean for you and your employees?

Employers must adapt to the ever-changing labor market to ensure that their pay practices continue to attract talented employees, but there are many lessons for employers from this research.  First, the pay gap is a reflection of the many individual choices men and women make about their education, industry, and occupation (to name a few), and research suggests that much of the global gender wage gap is a reflection of gender differences in preferences for occupations with more flexible schedules.  Second, occupations where unpredictable and long hours are a necessity will pay more than similar occupations with more flexibility, regardless of the individual’s protected status.  Third, the labor market has been disrupted by the COVID-19 pandemic, and compensation policies in many occupations need to adjust to a “new normal” where working from home and flexible schedules are the norm.

Sources:

[1] Semega, Jessica. (September 10, 2019). Payday, Poverty, and Women. U.S. Census Bureau.  www.census.gov/library/stories/2019/09/payday-poverty-and-women.html

[2] Women’s Bureau. Employment and Earnings by Occupation. U.S. Department of Labor. https://www.dol.gov/agencies/wb/data/occupations

[3] Goldin, Claudia and Lawrence F. Katz. 2016. A Most Egalitarian Profession: Pharmacy and the Evolution of a Family-Friendly Occupation. Journal of Labor Economics. 34(3). 705-1106.

[4] Mas, Alexandre and Amanda Pallais. 2017. Valuing Alternative Work Arrangements. American Economic Review. 107(12): 3722-3759.

 

The opinions expressed are those of the author(s) and do not necessarily reflect the views of our firm or its clients.